(Sigh) - no, your clever maneuver to make a wash not look like a wash doesn't work. It was not a pair of EFRPs.
In the continuing exploration of how one can try to arrange their book through trades that will disguise a wash trade, Nomura was just fined $30K for reporting two EFRP trades that just so happened to work together to act as a wash trade between two accounts with common beneficial owner. The exchange noted the trades and asked for documentation of the physical delivery contracts behind the EFRP.
Yes, a exchange can ask through a "special call" for production of the specific physical delivery contracts behind an EFRP. Failure to have an executed physical contract prior to the futures transactions converts the declared EFRP into an illegal off-market futures transaction. There were a significant number of special calls in the energy and agricultural markets in the late 2000's regarding EFRPs - the largest fine I recall was a $5MM fine of Morgan Stanley for a pattern of EFRP abuse.
In this case, Nomura appears to have used two EFRPs to consummate the two sides of a wash trade without having underlying supporting documentation.
This fine appears to be above the norm for a single EFRP violation. My opinion is that the use of non-valid EFRPs to attempt to disguise a wash trade led to a heavier penalty. I would note that the CME disciplinary notice here did not include specific language that indicated my opinion was the motivating factor for the level of the penalty.
This, once again, proves that the exchanges have the ability to peruse all executions to determine if beneficial accounts are on both sides of the transaction and then to drill deeper into why this would occur. The level of information about account attribution significantly increased with the revised Form 40 and this type of analysis is much easier for the exchanges to perform.
Once again, the CME has fined a company and a trader for wash trades. The trades were between two accounts with the same beneficial owner and, the CME notes, were designed to delta hedge OTC options. So - the intent to actually do the trades is fairly easy to find. But so is are the trades.
The company, in this case a bank, gets all its transactions. It knows its accounts and beneficial owners. How hard is it to set up a simple match (mind you, on a large scale, it is still a lot of data to go through) that says look at all trades. Compare whether the buy and sell side of the same transaction are in our executions. Compare the accounts - do they have the same beneficial owner? If yes, possible wash trade. There is additional data in the exchange data feed that can let you scrub out trades where there is the same account or accounts with the same beneficial owner as allowable. Yes, there are trades where the same account is matched on both sides of the transaction that are allowed under exchange rules. Failing to understand the allowable filters and the data needed to operate those filters and how to get the data and store it is one of the primary reasons for massive false positive issues. But that is a discussion for another day.
But just having done that would have avoided the disciplinary impacts. The company was fined $40K for "failure to supervise" and, more importantly, is probably on the exchange radar as not doing a thorough job of compliance oversight - meaning the exchange has to look closer at future issues since the company compliance is not seen as reliable. In addition, the trader was fined $10K and suspended from the access to the exchange for 5 days. That is 5 days someone else has to manage that person's book - and most desks don't have spare people just lying around.
So, understanding what is easy and what is hard and where the risks are is a central component to effective compliance. It is just the cost of entry to trading in today's electronic markets. Don't treat it as an incidental cost of doing business and end up with even great issues.
The notice for the company is here and the trader here
Block trades are a very useful trading tool and a legal "ex pit" transaction. They can allow you greater ease of execution, increased large volume liquidity, and can avoid having a firm "step in front of you" in the market. But they come with reporting rules for bilateral block trades that people some times overlook.
The largest action in this area in the last decade was a $14MM civil fine of Morgan Stanley by the CFTC for a TAS block trade reporting issue. The CME notice is here. But there was recent CME fine for $135K to a firm for multiple reporting failures regarding NYMEX energy block trades in 2017. (note, we had a prior blog entry on the fact that issues with the exchanges may take time to proceed). The disciplinary notice is here.
The CME fine was for both block trade reporting issues and failure to train staff properly - leading to another of the "failure to supervise" issues that have become common recently. It should be noted that failure to report a block trade properly changes it from a legal "ex pit" transaction to, literally, an illegal off exchange future transaction. Block trade training is not that difficult and should be on your basic exchange rules training program.
DCM is an advisory firm providing strategic and compliance services to commodity market participants - whether end user, producer, trading or marketing firm.